Last year wasn't a particularly positive one for automotive stocks. Top companies in the space, like Ford, General Motors, Stellantis, and Tesla, saw their share prices crater. Persistent inflation, rising interest rates, and ongoing supply chain issues have all contributed to the sector's latest woes, while also causing investors to sour on their stocks.
But lately, one top auto stock is revving its engine. As of this writing, Ferrari (RACE 2.42%) shares are up 22% so far in 2023. Here's why buying the stock right now could be a genius move.
Not your typical automaker
For starters, it's worth highlighting that while Ferrari sells cars, it is not like your usual automobile manufacturer. Ford and GM, which dominate the U.S. market with a combined $302 billion in 2022 revenue, carry operating margins that averaged 7.5% and 4.7%, respectively, over the past decade. Moreover, these companies' revenue growth has been disappointing or downright nonexistent. Ford's revenue in 2022 was $158 billion, compared to $134 billion in 2012. And GM's revenue in 2022 was $144 billion, compared to $150 billion in 2012.
Making matters worse is just how cyclical these businesses are, extremely influenced by the whims of the broader economy. Both companies saw huge sales declines during the Great Recession more than a decade ago. Add in their thin margins and huge capital requirements, and it's not hard to see why they have historically made poor investments.
With the negative attributes of a typical carmaker in mind, it's obvious why Ferrari is winning the race. This enterprise is more akin to a luxury brand than a traditional auto business. To demonstrate this point, consider that Ferrari's 2022 operating margin of 24.1% is on par with other luxury houses such as LVMH's 26.5% margin.
Additionally, Ferrari prides itself on the exclusivity of its cars. There's usually an 18-month wait list for prospective customers. Supply is intentionally kept below surging demand. And this results in proven pricing power. The estimated average selling price (ASP) of a Ferrari in 2022 was a whopping $385,000. Consequently, one could make a valid argument that as the prices for Ferrari cars go up, more customers would want them. This is known as a Veblen good.
Ferrari continues to show its financial success. In 2022, unit shipments were up 18.5% year over year to 13,221, with net revenue rising 19.3% versus 2021. This sales figure is up 35.3% from 2019's pre-pandemic total. And diluted earnings per share were up 13.1% last year.
What makes Ferrari particularly attractive right now from an investment perspective is its resilience to recessionary times. In 2009, during the depths of the Great Recession, net revenue dropped 7% and shipments fell 5%. These numbers look incredibly better in the context of the overall industry. That year, shipments in the luxury sports car market dipped 35%, meaning Ferrari actually gained share. Having some of the world's wealthiest people crave what you're selling is a powerful position to be in.
With economic uncertainty continuing to remain elevated, investors might want to look at Ferrari as a potential portfolio addition right now.
Looking at the valuation
Since being spun off from its previous parent company, Fiat Chrysler (now part of Stellantis), in late 2015, Ferrari's stock price has climbed 377% (as of this writing). This performance trounces both the S&P 500 and the Nasdaq Composite Index during the same time. And unsurprisingly, with the stock off to a strong start this year, shares trade at a price-to-earnings (P/E) ratio of 48. This is above the stock's historical average P/E of 37, and it is far greater than the valuations of legacy automakers.
This steep price might cause investors to hesitate, but it might be worth paying a premium for such an outstanding business, especially if there is a recession in 2023. Owning Ferrari could do wonders for your peace of mind at a time when markets could experience elevated volatility for some time.
Management remains optimistic as we look out toward this year. It expects double-digit top- and bottom-line growth in 2023. With dividends and share repurchases also a part of the equation, there's a lot to like about Ferrari.
